Is back-to-basics approach the best way to tackle the recession’s impact?
Yes, that’s exactly what we’re advising. When faced with challenges like this it can be tempting to look for ‘silver bullets’, and by that I mean sophisticated and complex answers which claim to mitigate an organisation’s risk. The reality is that these do not exist. Instead, critically examine the foundations of your organisation, and modify these to meet the changing demands of your external environment. At the same time, the aim must be to increase your agility and the ability to respond to wider range of market conditions.
Given the level of uncertainty in the economy, what steps can organisations take to plan and manage their businesses?
Many are looking to scenario-based planning. This tool guides management and decision-making processes, and also looks ahead at the capabilities that must be built for long-term value creation. This is more than just having Plan B – it’s an approach that involves developing future scenarios and then creating strategies and decision points for each. It provides management with an approach for determining how to respond to and manage business owners, customers, competitors and suppliers in response to change. It is about planning for the worst, but of course still hoping for the best.
So how would that work in relation to the recession?
Two primary scenarios for how the current recession could play out are:
1) Medium recession which lasts for 24 months before the local and global economies begin slow 24-month path to recovery in which positive growth undulates and finally stabilises; or
2) Long global recession where stable positive growth does not return for five-plus years.
Organisations should prepare strategy for each scenario, highlighting the ‘core’ elements and capabilities that appear in all scenarios – these are the areas where there should be investment. An example might be replacing critical sales system which is outdated and no longer able to be supported.
And what happens if the state of play changes?
Through the planning process ‘trigger points’ are also established. These are indicators that one scenario has become more likely, and investment choices and planning should be shifted to execute the strategy associated with that scenario. So, for example, if medium recession appears to be turning into long global recession then targeted cost-reduction programme might escalate from general head office ‘belt tightening’ to broader, organisation-wide cost-cutting initiative.
To complement the planning cycle what ‘structural’ changes should an organisation consider?
The economic downturn presents different challenges to what New Zealand businesses have experienced over the past decade. So different focus, different set of management actions and re-assessment of organisational strategy might be on the cards. Growth during the good times may have created structural weaknesses which can result in extra pain through the downturn. You need to re-evaluate this now, before the pain reaches breaking point. Ask these three critical questions:
1) Does your organisation have the right people with the right skills in the right roles and teams? You need the right leadership structure in place to manage change in volatile times.
2) Does your organisational structure reflect the key critical areas of focus and accountability for your business?
3) Are your resources organised to best meet customer needs?
Given the increased complexity and difficulty of planning, should organisations also examine their approach to reporting?
Reporting is critical to ensure the management and board receive accurate, reliable, timely and actionable information. difficult financial environment exposes organisations to increased risk, with increased demands for information and strong decision-making. Things can and will go wrong, and it is important for issues to be quickly and accurately communicated to management and the board: there should be no surprises.
Where can good reporting make real difference?
The first is the challenge of managing expectations. Everyone is looking for answers and guidance, so sharing business results with the market and within the organisation is useful to educate and build consensus for the tough calls that may need to be made. For example, closing an under-performing business unit may ensure the remainder of the organisation remains solvent.
The second area where reporting is crucial is around good decision-making. This is challenging in changing environment, and reporting must be flexible enough to provide support. For example, reliable forecasting of the sales pipeline is difficult given the uncertainty present in the market – and as result planning cycles could be condensed and more frequent.
What should management team be asking to ensure their reporting is optimal?
Are the board comfortable with the information they are receiving in terms of time, forward focus and quality? Is there good ‘line of sight’ between board level reporting and the underlying systems? And the third question is: have the core KPIs changed to meet market conditions, and are they aligned with incentives? For example, the profit targets for business unit heavily exposed to discretionary spend by consumers may need to be reduced, but could be increased for one which is ‘recession proof’.
Are there specific techniques that organisations can use to complement their planning and reporting approaches?
Diagnosing issues and areas of under performance in processes could provide valuable insights and potentially save time and money. Benchmarking is useful technique that involves segmenting business processes, comparing performance against internal and external standards, and highlighting areas where there is room for improvement. This is especially important during downturn as it provides the facts about the efficiency and effectiveness of business processes, and eliminates ‘gut-feel’ decisions.
By analysing other organisations, insights into best practice are provided. This information could be used to identify where reorganisation, process improvement or outsourcing might cut costs without adversely affecting performance.
What must be in place to support more agile approach to managing the organisation?
The need for good information management is amplified in climate where speedy reactions are required to deal with uncertain and changing market conditions. Information and data shed light on business issues: for example, what is the relative profitability of diverse range of products? Which brands should be actively grown and which should be discontinued? Most organisations do not fully utilise their ‘information assets’ and risk making partially informed decisions.
Organisations should also be actively challenging their approach to information management to ensure it is meeting its needs, and that it will meet them into the future.
What opportunities are there around information management?
1) Consider how to improve the utilisation of existing information to facilitate ‘data-driven decision-making’, in cost effective manner.
2) Most data can be optimised with modern-day technology and techniques, for example analysis to find trends identifying profitable customer segments. Organisations need to consider where analysis is required to support key business decisions, such as launching marketing campaign aimed at growing highly profitable customer segment.
Key data/models can be outsourced, with third-party providers providing insights via specialised analytical models and techniques.
Matthew Hitch leads the consulting practice for Deloitte in New Zealand.
